RISK ASSESSMENT

INTERNAL DEMAND WILL CONTINUE TO DRIVE GROWTH

Growth picked up in 2017, in particular thanks to accelerating business investment and a rebound in electricity exports and tourism. While household consumption slowed in 2017, following exceptional favourable events in 2016 – a particularly cold winter (heating, clothes purchases); the Euro football championship –, it is expected to bounce back in 2018 thanks to higher purchasing power. Real wages are expected to rise, because of incipient labour market tensions (growing number of companies declaring difficulties with recruitment). While job creation in the commercial sector (+300,000 in the first half of 2017 year-on-year) is expected to remain dynamic, the cut to one third of assisted jobs (-110,000 between 2017 and 2018) will slow the downward trend of the unemployment rate, which will remain at about 9%. High levels of confidence and particularly favourable credit conditions will continue to drive robust household consumption and investment, which will specifically benefit sectors such as automotive, retail, and construction (building permits up by 12% year-on-year at end October 2017). These same factors will encourage business investment, which should therefore remain dynamic in 2018. Competitiveness and Employment Tax Credit (CICE) and low energy costs have helped manufacturing companies to rebuild their margins (35.3% in 2016, highest level since 2002). Nevertheless, as investment is conducted largely through credit, corporate debt will continue to rise (72% of GDP in Q2, +2 percentage points year-on-year). Insolvencies will continue to decline in 2018 (-2% after -2.6% in 2016 and -8% year-on-year in November 2017) and business creation will grow (+6% year-on-year in November 2017).

The external contribution is likely to be less negative in 2018, thanks to accelerating exports in a context of strong demand from partners and cost/competitiveness gains recorded in recent years. With the effects of the terrorist attacks of 2015 and 2016 fading, tourism rebounded in 2017, and is expected to accelerate further in 2018. Hotel stays grew 4.8% year-on-year over the first nine months of 2017, thanks to the return of foreign tourists (+8.1%), a trend which should be confirmed in 2018. At the same time, imports will continue to be driven by capital goods needed for corporate investment and by higher oil barrel prices, which should nonetheless be offset by the slight appreciation of the euro.

HEAVY DEBT BURDEN FUELLED BY TWIN DEFICITS

The balance of goods runs a structural deficit, as France is a net energy importer. In contrast, the balance of services is in surplus thanks to tourism revenues. Since 2015, the goods and services balance excluding energy has become negative, as the manufactured products deficit has steadily widened due to the delocalisation of automotive production and of investments in machines. This deficit is partially offset by the income surplus (dividends of French subsidiaries abroad). The current account deficit is mainly financed by the issuance of debt securities held by non-residents.

Due to the limited leeway on the budget, although the 2018 finance law contains several tax cuts (30% flat-rate tax on financial income, replacement of net worth tax by a property tax, removal of employee contributions, cuts to council tax), these will be offset by a 1.7 percentage point rise in the CSG (General Social Security Contribution) and spending cuts totalling EUR 15 billion (housing, health, local authorities, assisted jobs). As a result, the public deficit should remain below the 3% threshold in 2018, but the public debt - one of the highest in the eurozone - will remain one of the few not to decline.

CONTINUATION OF REFORM AGENDA IN 2018

President Emmanuel Macron, elected in May 2017, has an absolute majority in the National Assembly via his party, La République En Marche!. During the first months of his term, President Macron passed the aforementioned fiscal measures, as well as a reform aimed at making the labour market more flexible. Although the government announced reforms to unemployment insurance for 2018 and to vocational training, these will be much less far-reaching than the texts already passed. In contrast, reform of the pension system (removal of special regimes), which is due to be launched in 2018, could lead to significant union protests. Nevertheless, President Macron enjoys fairly high popularity ratings and strong legitimacy following his victories in the presidential and parliamentary elections, while the main opposition parties (Socialist Party on the left and Les Républicains on the right) are undergoing a period of rebuilding. Although one of President Macron’s commitments was to boost the building of Europe, any progress will depend on the political situation in Germany.